Rule 37(c)(1) Sanctions — Damages Evidence Excluded for Failure to Include Computation in Either Initial Disclosures or Expert Report — No Excuse That Recalculation Would Have Been Necessary Once Dispute over Methodology Resolved

City of Rome v. Hotels.com, LP, 2013 U.S. App. LEXIS 24745 (11th Cir. Dec. 13, 2013):

Plaintiff City of Rome, on behalf of the certified class of over 250 cities and counties throughout Georgia ("the Localities"), appeals both the district court's grant of summary judgment on its claims for back taxes allegedly owed by the defendant online travel companies ("OTCs") and the district court's imposition of sanctions for violation of its disclosure obligations under Federal Rule of Civil Procedure 26(a). The Localities argue that they are entitled to relief under O.C.G.A. § 48-13-50 et seq. ("the Enabling Statute"), as well as on their state common law claims. Alternatively, they propose that this Court certify a question to the Georgia Supreme Court regarding the precedential effect of two decisions relied upon by the District Court. However, because (1) the Localities failed to present evidence that the OTCs actually collected excess taxes, (2) state law clearly precludes relief, and (3) the district court did not abuse its discretion in imposing sanctions under Federal Rule of Civil Procedure 37(c), we deny the Localities' request to certify the proposed question and affirm the district court's grant of summary judgment. ***

At issue in the case is the OTCs' business model, specifically, their method of calculating and remitting the appropriate amount of local occupancy taxes under the Enabling Statute. The OTCs contract with hotels to purchase hotel rooms at a negotiated "wholesale" rate. They then sell these rooms to consumers at a higher "retail" rate. At the time of sale, the customer is charged a single amount consisting of the retail rate and an additional amount which the OTCs characterize as "taxes and fees." The hotels then invoice the OTCs for the negotiated "wholesale rate" plus any taxes applicable to the "wholesale" price. The hotels then remit the taxes due under the Enabling Statute to the appropriate city or county. The Localities allege that the OTCs have violated the Enabling Statute by failing to pay the local occupancy tax on the retail rate charged to customers. They seek to recover unpaid occupancy taxes from the OTCs on these transactions.

After more than five years of litigation, the parties entered into a partial settlement agreement. The OTCs agreed to pay an initial sum corresponding to the excess taxes owed on all transactions occurring after May 16, 2011, as well as, to collect and remit occupancy taxes on the retail rate on all future transactions. However, the settlement agreement expressly reserved for judicial resolution the OTCs' liability for back taxes owed on all transactions prior to May 16, 2011.

On those claims, the district court granted summary judgment in favor of the OTCs. It concluded that the Localities failed to present evidence showing that the OTCs actually collected, but failed to remit, taxes in non-breakage transactions [n. 4   Non-breakage transactions are those where the OTC remitted at least some portion of tax monies collected] on the retail rate. It also held that Georgia law did not permit recovery of back taxes that the OTCs never collected. Finally, it excluded the Localities' evidence of damages in breakage transactions [n. 5   Breakage transactions   are those where the OTC does not remit any monies collected, including hotel excise taxes, to the hotel because either the customer failed to show up for the reservation or the hotel failed to invoice the OTC] because the Localities failed to disclose computations of breakage damages required under Rule 26(a).

***

E. The Localities'  Claim For Breakage Damages

The final issue is whether the district court erred by excluding evidence relating to the Localities' computation of back tax damages in breakage transactions.  The district court excluded the Localities' evidence of breakage damages based on their failure to provide a sufficient computation of their damages under Federal Rule of Civil Procedure 26(a)(1)(A)(iii).

Rule 37(c) of the Federal Rules of Civil Procedure provides for sanctions against a party that fails to disclose information required under Rule 26(a). Specifically, the rule states:

   If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at trial, unless the failure was substantially justified or is harmless.

Fed. R. Civ. P. 37(c)(1). Disclosures required under Rule 26(a) include a "computation of each category of damages claimed by the disclosing party." Fed. R. Civ. P. 26(a)(1)(A)(iii).

Here, the district court's exclusion is supported by the record. The Localities' expert reports did not provide a computation of breakage damages. Thus, the district court did not abuse its discretion in concluding that the Localities failed to satisfy their disclosure obligations under Rule 26(a).

The Localities argue that their failure to provide a calculation of breakage damages was "substantially justified" because (1) they did not have certified data to calculate breakage damages, and (2) a final recalculation of damages would have been necessary since there was a pending dispute over how to properly calculate damages. Thus, they contend any computation would not be worthwhile.

We reject this attempt to shirk their responsibility under Rule 26(a) and unload their obligation to provide initial disclosures onto the party the rule is designed to protect for several reasons. First, they cite no authority allowing them, without leave, to avoid their disclosure obligations under Rule 26(a) on this basis. Second, the Localities had ample opportunity during the six years in which suit was pending to seek discovery on the amount of breakage damages and to develop and present a calculation to the court. Third, their argument is plainly defeated by the structure of Rule 26. If the OTCs' certification or the pending dispute altered the required computation, the  Localities could resort to Rule 26(e) and supplement their disclosures. While they believe that they are excused from providing any disclosure until it is verifiably final, the rule contemplates that in certain circumstances, the need will arise for the disclosing party to supplement their initial disclosures. This is one of those circumstances. Consequently, the district court did not abuse its discretion in concluding that the Localities were not substantially justified in failing to provide a computation of breakage damages.

The Localities also argue that its failure to provide a damage calculation was harmless because the OTCs had long known their methodology for calculating breakage damages. However,   because we agree with the district court that reopening discovery at this stage in the proceedings would constitute significant harm, the district court did not abuse its broad discretion in concluding that the Localities' failure to provide a calculation of breakage damages was not harmless.

The Localities also request that we adopt a test to determine the extent of violation and propriety of sanctions and to remand to the district court with direction. However, we see no need to do so here. The district court's sanctions were appropriate under both the circumstances of this case and well-established standards for applying Rule 37. Accordingly, the district court's imposition of sanctions is AFFIRMED.

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